Marshall–Lerner Condition

Origins and the elasticities approach

When a currency loses value, exports become cheaper abroad and imports become dearer at home. But because the same volume of imports now costs more domestic currency, the trade balance can actually worsen if quantities do not respond enough. Alfred Marshall (1923) analyzed the responsiveness of demand in international trade, and Abba Lerner (1944) stated the relationship between exchange rate changes and the trade balance concisely. According to the condition, when trade starts in balance, a devaluation improves the trade balance only if the two demand elasticities sum to more than one. This line of analysis is known as the elasticities approach to the balance of payments.

Generalization and critiques

Bickerdike (1920), Joan Robinson (1937) and Metzler (1948) derived a more general condition that allows for less than infinitely elastic supply, now called the Bickerdike–Robinson–Metzler condition, of which Marshall–Lerner is a special case. Harberger (1950) incorporated the income effects of devaluation, and Alexander (1952) proposed the absorption approach, which starts from the identity that the trade balance equals national income minus domestic spending, and argued that elasticities alone cannot explain the outcome. Later work such as Dornbusch (1975) broadened the analysis to include money and asset markets. This lineage connects to the Mundell–Fleming model and the exchange rate overshooting model.

Empirical work and the J-curve

Houthakker and Magee (1969) estimated income and price elasticities of trade for major economies and set a benchmark for later research. Bahmani-Oskooee and Niroomand (1998) reported that the Marshall–Lerner condition holds for many countries when long-run price elasticities are used, and Boyd, Caporale and Smith (2001) reached similar conclusions with cointegration methods. In the short run, however, trade volumes adjust slowly because of contracts and established practices, so the condition may fail. This is why the trade balance can worsen briefly after a devaluation before improving, a pattern known as the J-curve effect. Bahmani-Oskooee and Hegerty (2010) survey this literature in depth.

FAQ

What is the Marshall–Lerner condition in simple terms?

It says that a fall in a currency's value improves the trade balance only if export and import volumes respond strongly enough to the change in prices.

What happens if the condition does not hold?

If the elasticities sum to less than one, the higher cost of imports outweighs the change in volumes, so a depreciation can worsen the trade balance.

Sources reviewed: 2026-10-26

References

1. Marshall, A. (1923). Money, Credit and Commerce. London: Macmillan.
2. Lerner, A. P. (1944). The Economics of Control: Principles of Welfare Economics. New York: Macmillan.
3. Bickerdike, C. F. (1920). The instability of foreign exchange. Economic Journal, 30(117), 118–122.
4. Robinson, J. (1937). The foreign exchanges. In Essays in the Theory of Employment (pp. 183–209). London: Macmillan.
5. Metzler, L. A. (1948). The theory of international trade. In H. S. Ellis (Ed.), A Survey of Contemporary Economics (pp. 210–254). Philadelphia: Blakiston.
6. Harberger, A. C. (1950). Currency depreciation, income, and the balance of trade. Journal of Political Economy, 58(1), 47–60.
7. Alexander, S. S. (1952). Effects of a devaluation on a trade balance. IMF Staff Papers, 2(2), 263–278.
8. Houthakker, H. S., & Magee, S. P. (1969). Income and price elasticities in world trade. Review of Economics and Statistics, 51(2), 111–125.
9. Dornbusch, R. (1975). Exchange rates and fiscal policy in a popular model of international trade. American Economic Review, 65(5), 859–871.
10. Krugman, P. R., & Obstfeld, M. (1988). International Economics: Theory and Policy. Glenview, IL: Scott, Foresman.
11. Bahmani-Oskooee, M., & Niroomand, F. (1998). Long-run price elasticities and the Marshall–Lerner condition revisited. Economics Letters, 61(1), 101–109.
12. Boyd, D., Caporale, G. M., & Smith, R. (2001). Real exchange rate effects on the balance of trade: Cointegration and the Marshall–Lerner condition. International Journal of Finance & Economics, 6(3), 187–200.
13. Bahmani-Oskooee, M., & Hegerty, S. W. (2010). The J- and S-curves: A survey of the recent literature. Journal of Economic Studies, 37(6), 580–596.